This Estimate is the US Intelligence Community's first integrated assessment of Soviet energy policies and prospects. It brings together the Community's best information and judgments on energy production possibilities, consumption trends, export needs both to supply Eastern Europe and to earn hard currency, investment costs, and policy priorities.

During the past several years, members of the Intelligence Com-.particular OA andpublished differingof Soviet energy production, consumption, and exports. The Estimate reflects considerable change over the past several years in some Community members' view of Soviet oil production prospects. In particular CIA. which78 predicted rapid declines in Soviet oil production beginningas substantially changed its assessment. The current CIA view is that Soviet oil production will level off in thend thenelatively slow decline. There appear to be two principal reasons for the substantial change in the CIA estimate:

Information from intelligence sources that became available in recent years indicates that Soviet proved oil reserves are probably about twice as large as CIA previously thought.

The Soviet leadership became very concerned about oiland. beginninget in motion an intensive, high-priority effort lo develop West Siberian oil and gas as quickly as possible, with (he help of rapidly rising investment expenditures.

In addition to new information on energy production possibilities and Soviet energy policies, the Estimate reflects the findings of recent studies of Soviet energy demand, including the possibilities forsubstitution, and conservation.

Although differences remain among experts and between agencies, thereroad consensus on the general trends and problems of (heenergy sector and the principal energy (rade-offs facing (he Soviet leadership There isroad consensus on the nature andof the USSR's dciwndence on the West for eneigy markets, equipment, and technology.

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KEY JUDGMENTS

Soviel energy developments are likely to affect US and Western interests in two principal ways- First, with the largest energy reserves in the world, the USSR In the long term has the potential to become asource of energy, especially natural gas, for the West This wouldarge boost to Moscow's hard currency earningsasis for expanded Soviet influence in Western Europe. Second, inhe rising cost of energy development is diverting investment resources that are badly needed elsewhere in the Soviel economy. This is making the choices among consumption, investment, and defense substantially more difficult Soviet efforts to minimize these difficulties could result in energy production levels too low to even maintain the present level of total energy exports over the remainder of the decade while meeting domestic energy requirements.

The USSR is in transition from reliance on cheap energy to the use of expensive energy. Unlike the West, which has already completed much of its adjustment, however, the USSR will feel the major impact of this transition in. Because of the inertia of Soviet planning and the overwhelming emphasis given to meeting production targets, the USSR has not yet made any significant progress in holding down the demand for energy through conservation. Energy consumption has grown faster than GNP. and is likely lo growate close to Oiat of GNP innless Moscow is willing to push energy conservation even at the expense of other economic objectives.

Consequently. Moscow must increase investment in energyvery rapidly if it is to meet domestic energy requirements andecline in hard currency earnings., energyare increasing by aboutercent over those, mainly becauseear doubling in oil investmentwo-thirds increase in investment in gas development and pipelines; in spite of rapidly rising investment, the rate of growth of energy output is declining. Energy is now taking overercent of total investment, up sharply from aboutercent. The resulting large claim on investment resourcesime when the growth of total investment has slowed is making it difficult for other sectors lo gel their new programs funded and hasajor factor depressing the growth of the Soviet economy. Investment in heavy industry is increasing slowly; efforts are

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being made to rebuild the transportation sector after decades of neglect; agriculture is holding its own in investment allocations, and together with energy is takingercent of the total; investment in consumer-orientedlight industry, andprobably falling in absolute terms.

The investment burden will probably continue to mount during the second half of the decade unless the growth of energy consumption, especially of oil, can be slowed, thereby permitting domestic and export needs to be metlower growth of energyontinuing squeeze on investment in other economic sectors might jeopardize objectives for raising living standards or possibly even military production. Consequently, energy policy is likely toontentious issue in preparing the next five-year plan; specifically, political opposition to costly production-oriented energy policies is likelyuild.

A Soviet policy shift involving increased reliance on energy conservation and interfuel substitution to assure adequate energy supplies, while reducing the investment burden, would involve risks of misjudging the volume of energy savings that the Soviet economic system could generate. In such an event, energy supplies would become insufficient to cover demand, resulting in worsening domestic energy shortagesharp decline in energy exports until policies were corrected.

We do not yet have any clear indications of Soviet policy concerning energy investment, production, and consumption. Some critical policy decisions probably have not yet been made. In this uncertain situation, judgments differ about which energy policy mix is likely to be adopted, and on how much difficulty the USSR is likely to experience in achieving an acceptable balance among its main energy objectives. Some analysts, including those in DIA, believe that Moscow will correctly assess both demand trends and the technical requirements for energy production, and consequently will produce as much oil as is necessary to meet domestic and export needs. They believe that if progress in energy conservation and interfuel substitution proves to be slow and Moscow considers it necessary to maintain oil exports, the Soviets would keep oil production fairly constant They realize that the burden of energy investment may continue to increase, but believe that the increase will not be large Moreover, Moscow may believe that the economic benefits from incremental energythe resulting hard currencysuch, on balance, as to enhance the overall productivity of

the economy. Other analysts, including those in CIA/DDI. believe that rapidly rising investment costs and worsening operating conditions are likely to leadradual fall in oil productionhey alsothat the Soviet leadership will, as in the past, overestimate the possibilities for energy conservation and interfuel substitution.shortfalls in oil supply could develop that would disrupt theeconomy and squeeze exports. Because opportunities to reduce oil deliveries to Eastern Europe and to increase gas sales are limited in, these analystsecline in hard currency earnings from energy exports if oil and gas prices are unchanged.

The cost of producing Soviet oil. historically low by worldis rising rapidly and is likely to continue to increase. Productivity of new wells in West Siberia is declining as exploitation shifts from the highly productive giant and supergiant fields, which have peaked or soon will peak, to smaller, less productive fields. Secondary and enhanced recovery methods are increasingly being applied to mature fields, especially in the older producing regions, in order to slow thein production rates.

The Soviets planmall increase in oil output5 and. because of an intensive investment effort in West Siberia, they will probably reach the plan goal6 million barrels per day or come close to doing so. Oil reserves are sufficient to sustain production at this rate for the remainder of the decade. However, with' the cost of oillikely to continue increasing rapidly, with gas-for-oil. especially in industry and electric power, offsetting rising oil demand in transportation and agriculture and possibly permitting oil consumption to level off in the latter part of the decade, and witfi gas exports rising rapidly, Moscow mayecline in oil production in the latter part of the decade.

Natural gas is, in the long term, the USSR's cheapest energy source. On completion of the current massive program to build .fivepipelines from the remote West Siberian gasfields to supply the consuming regions in the USSR and one to supply Eastern and Western Europe, the Soviets wilt be able to further expand gas production at moderate and fairly constant cost. By the, gas production will probably approach that of oil (in terms of caloricnless limited by domestic and foreign demand.

Coal production is unlikely to increase appreciably until the USSR can develop or acquire technologies that would make the transportation of coal from areas east of the Urals or the long-distance transmission of

electric power economically justified. Such technologies are unlikely to be available until. Although the Soviet nuclear power program continues to lag far behind plan, about half of the likely increase in eieciric power production inill come from nuclear plants-Energy exports in the balance ofill be affectedomplex mix of factors that neither we nor the Soviet Government can predict with any confidence, including energy prices in the West. Moscow's main concern with respect to energy exports will be to earn the hard currency necessary to buy needed imports from the West while continuing to supply at least the minimum needs of its client states. Gas exports probably will rise by two-thirds while total oil exports will probably decline.

Eastern Europe may not be able to rely on supplies of Soviet oil to the extent it has in the past. The tight hard currency position of thecountries prevents them from turninghe world market for large added supplies of oil. Thereotential in Eastern Europe for energy conservation and for some further substitution of Soviet gas for oil in industry, but progress will beurther cut in Soviet oilto the near-stagnant economies of Eastern Europe would intensify the need for austerity measures and aggravate the danger of popular unrest there- Because it holds the trump card of coercive power, however. Moscow is likely to impose further cuts on the supply of oil to Eastern Europe if oil supplies would otherwise be inadequate to "meet priority objectives of the regime.

Moscow will continue to stress energy exports for hard currency to buy technology needed for industrial modernization and for special applications in energy exploitation and defense production, and to acquire the agricultural products necessary to offset domestic shortfalls. Although oil exports will probably decline, the USSR willigh priority on maintaining these exportsubstantial, level because of their importance and flexibilityard currency earner. Moscow will beosition to offer the West European countries all the gas they are willing to buy innd can undercut the prices of any Western supplier while stillarge profit. If and when the Siberia to Western Europe gas pipeline is used to capacity. Soviet gas exports to the West will double their present level. If Moscow lands contracts to supply even half of the West European gas-demand gap now foreseen for, an additional pipeline the size of tbe one now underwould be required, and dependence on Soviet gas could approachercent of gas consumpfion for major West European

countries, far in excess ofpercent share tliat wc and some West European governments regardritical threshold for political risk.

Additional large Western purchases of Soviet gas would give the Soviets large economic gains. Increased Soviet gas production forould substitute for exported oil at perhaps one-third of the investnifnl cost. Alternatively, if oil 'exports were held^constant, iUwoutd-add greatly to Soviet hard currency earnings. Eachnewjgas pipeline of the size of the line to Western Europe now under construction potentially permits additional gas sales worth nearlyill ion annually at present prices, or about one-fifth of total current Soviet hard currency earnings. Such added hard currency earnings would enable Moscow to raise substantially imports of Western goods and technology that the Soviet economy badly needs.

The cost and speed of Soviet energy development will depend partly on the level of imports of Western energy equipment and technology. Although Soviel dependence on imports of Western pipe and compressors for gas pipelines should decline, dependence on imports of Western oil equipment will increase as production shifts to deeper and more complex onshore and offshoreost of the needed equipment is available from non-US Western sources.

The high cost of Soviet energy development has possiblenot only for Soviet economic growth but also for military programs. Although the military will probably retain its premier position in the resource competition, it cannot be fully insulated from the consequences of economic problems. Even if there is little direct competition for resources between energy and military industries, the growing cost of assuring adequate energy supplies could indirectlyactor slowing military expansion if it slows the development of the heavy industrial base on which future military growth depends.

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DISCUSSION

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Soviet Energy in Perspective

oviet eocrgy resources are major assets Tne USSR is the world's largest oil producer and has the largest oil reserve* outside live Persian Gulf. Soviet gas reserves arc the largest In the wotld..and this year or neat the USSR should surpass Ihc United State* ai the world's top gas producer. Coal resources are large, although unfavorably located. Oil and gas exports provide more than one-half of total Soviet bardearnings and supply tbe bulk of Easternrequirements for these source* of energy.has found oil exports, and more recently gas ei ports, to tbe West useful in pursuing its foreign policy objectives, and its exports to Eastern Europe are among the most Important economic links solidifying the Soviet Bloc

lthough the USSR It belter endowed withIran any other countryl il, like the rest of the world,ifficult transition from reliance on

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9

cheapelatively cosily energy. Energy costs are rising as production moves into more remote areas and as production condition! become more difficult with the depletion of the highest quality oil and coal deposits.

Soviet Energy Policy

Soviet energy policy has evolved in the same direction as that ol the major Western nations butag and with differences which reflect the particular Soviet energy endowment and economic system. Throughnd. Moscow relied on increases in production of crude oil and natural gas to cover most of the growth of its energy requirements.

03 Soviet crude oilalmost tripled. Soviet oil production strategy was to bring the largest and best fields to high production as quickly as possible, thereby ensuring maximum growth of output in relation to investmentSoviet drilling technology relied heavily on the turbodrill, which permitted the use of low-quility drill pipe and was well suited to the principal oil-bearing structures then being exploited. Early waterftooding raised reservoir pressures and. consequently, wellThb production strategy worked well Ins the Soviets exploited the rich deposits of ihe Volga-Urals area, including the superglant itomash-klno field. Ai production at these fields beganio.ff. even richer deposits were proved out in the West Siberian Basin, Including the supergiant Samottor field, so that continued substantial increases in oil production could be obtained at relatively little cost.

While continuing to develop the best Westoilfields rapidly, the Soviets began to consider longer term energy strategies that took Into account other energy sources and technologies. These included: expanded use of secondary and tertiary recovery methods in older producing areas; acceleratedof gas production, especially for export to the West; development of Siberian coal deposits;of nuclear power; and progress in energyBut many programs were Initiated without any comprehensive assessment of technical requirements, coiti. and priorities.

6 The need to reassess energy policy becameapparent to the Soviet leadership in theew superglant oilfields were not being found, the growth of oil production was slowing and falling behind plan,eveling off. ifecline. In production was in prospectery few years If something was not done. In addition, coaland nuclear power plant construction werebehind plan.

top-level decision on energy policy7 to give development of West Siberiangas an even greater priority. In the case of oil,ledapid Increase in investment.drilling, pumping, and Infrastructure.in ordergrowth io output The necessary skilledobtained by rotating drilling teams from theregions, as well as by expandingWest Siberian labor force. Althoughrose rapidly, oil production continuedlower rate In the case of gas. anfor building long-distance gas pipelinesInfrastructure was expanded slowlymajor West Siberian gasf ields.

Recent Soviet Energy Performance

recent years the USSR has experiencedin the growth of energy production,and net exports

growth of oil production has slowedearnd to less than 1

percent In the past two years.

Gas production increased at an average rateercentercent. and hu accounted for about two-thirds of the total Increment to total energy production3

Coal production has stagnated.

Nuclear power production has increased fairly rapidly, although less than planned.

The growth of total primary energy production has declined fromercent per year in the early andear

The growth of energy consumption has declinedercentercent per year over the corresponding period, with natural gasused, especially in industry

Total oil exports were up slightly62. eiports to Easternand Cuba increased while those to the Westthanks to higher prices, oporl earnings grew. Inxports to Eastern Europe declined while those to the West Increased

Key foctor* in Future Energy Development

ooking ahead to the remainder olnd beyond, the USSRituation in which energy prodttclion can be increased fait enough to meet domestic and export needs only with rapidly rising investment and an intensive management effort. The

development of West Siberian oil and gas will beigh priority; it will requite enormous investments in production facilities, long-distance pipelines, andinfrastructure under difficult, near-arcticThe Soviets inlan period are building the equivalent ofarge-dlamctcr pipelines of Ihe length of the Alaskan oil pipeline, and are planning to drill aboutillion meters for oil development In West Siberia. They are buildinguclear power plants and expanding five others, and are planning to greatly increase secondary processing facilities at their oil refineries. The dimensions of these energy development programs are enormousorld scale.

Production Possibilities OK

The USSR probably has sufficient oil0 billiono achieve oil productionhroughthe current rate is4ut doing so would be difficult and expensive- Soviet oil production inill depend mainly on the development of tlie West Siberian fields (figure I) Most established oil-producing areas outside West Siberia are well into Ihe declining phase of their development. Withercent or more of recoverable original reserves havingbeen produced in most large fields In the European USSR and in Central Asia, wellhave fallen to low levels and the percentage of water in well flow has become very high. Oiloutside West Siberia has been falling bynnuallynd continuedare inevitable. Secondary recovery efforts can slow the declineew fields, but will not greatly affect the overall regional patterns. Because of the long leadtime required and high costs involved,and development of potential oil-producing regions outside West Siberia (East Siberia. Sakhalin, Barents Sea) will notajor Impact on national production until.

Production in West Siberia will continue to increase, buteclining rate and at increasing cost As shown in figurehe flow ol oil per new well has been declining tapidly and the Soviets expect adeclineamotlor. the superglant field which at peak0 accounted for more lhan

ercent of national production. Is on Ihe decline and most other large West Siberian fields have peaked. There is still considerable room (or expansion of production in some very large fields (Pedorovo and Mamontovo, forut even these fields will probably peak by theeological analysis indicates lhal ibe Soviets may prove out Urgeod reserves ia West Siberia, including gas condensate, but that ihe odds on finding new supergi-ant or very large giant fields are low. Consequently, an increasing share of West Siberian production Is likely to come from small and medium-ifwith well productivities far below those of the giant and stipergi-ant fields in the earlier phases of their development, although still above those in the older producing regions of the USSR.

Tbe Soviets are counting on continuedincreases in West Siberian oil output, at least in the next few years Development drilling Is increasing rapidlyew long-distance oil pipeline which will raise West Siberian pipeline capacity bys under construction. In llic longer term, continued growth of West Siberian production will depend in large part on the quality of newlyfields

Development of West Siberian oil has involved major technical and management difficulties. These Include the problems of producing oil under swampy, near-arctic conditions, shortages of skilled labor, high labor turnover, and the inherent diffioultlcs of phasing and coordinating all of the necessary facilities.many facilities are already in place, theof infrastructure willarge, continuing burden

In addition to the massive West Siberianeffort, the'Soviets probably will have tooughly constant rate ol drilling to support declining production outside West Siberia, and to accelerate exploratory drilling, which has fallen sub-sumiallyhare of total drilling, as attention shifts to more remote and geologically difficult producing areas They will alio have to dealigh and increasing rate of depletion of existingcurrently aboutercent of the annual new capacity merely off sell depletion

OSCOW will probably nearly doubleomparcd with that

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Soviet stai*ni'ills, is well as our own analysis, indicate that oil investment will continue to Increase rapidly. For example, Soviet specialists havethat developrnenl drilling would have lo double every five years to maintain oil output at present levels.

Soviets apparently are making tberequired to achieve6rite plannednd probablythe plan, or come dose to doing0 are far more uncertain.not production remains stable dependstaquality of new oilfields, the willingness ofincur increasing costs, bow Soviet domesticevolves, and how badly Moscow needsoil exports.

Natural Gas

proved reserves ofrillionercent of ihe world's total, the USSItgas to Wgtifc continued expansion offor several decades. Although most of these reserves are of extraordinarily highpotential well flow rates among the highest in thelocation in the northern part of tbe West Siberianegion which is remote and also subject to permafrost and' other arctic conditions, creates major difficulties for production andIn addition to developing the enormous gas reserves in Tyumen, the Soviets are beginning to exploit sour gas deposits In the southernAstrakhan andIhe help of Western technology. This development will offset some of the decline in output of older fields, but will contribute lessercent of national output0

n recentaior constraint on the growth of gas production has been the construction ofgas pipelines and gas processing plants.the currentear Plan the Soviets ate building

da maior Irunk linesin the West Siberian cadields, fire ofh are to be linked to ibe domestic gas network and the riith is for export of gas lo Western Europe (figurewrtnictinn of there pipelinesassive undertaking: together the six linos0 kilometers lone to through difficult terrain; require enormous amounts of UtgeJiamcter pipe, most of which must be Imported from Western Europe and Japan, as well as large numbers ofand imported turbino-comptessors. pipelayers, and other equipment, and. tbe requirement for skilled labor willing to work under arduous conditions is difficult to meet Although the plan for laying pipe is on schedule, and annual gas production plans have been overfulfilled in the last two yean, the planhich requires subsUntially larger annualfor production thanot likely to be achieved, mainly because of lags in insulting pipeline compressors and gas processing equipment. The chances are that gas production will be upercent below tlwillion cubic meters but will slit! meet demand

However, the main constraint on Soviet gas production will become the demand for gas. not the ablUty to build long-distance pipelines. To permit largein domestic gas consumption, the Soviets will have toajor effort to expand the smaller lateral pipelines and distribution networks. Current plans call for construction0 kilometers of smaller linesnother large program will be needed. The ability to build these smaller pipelines and to substiiute gas for oil and possibly for coal domestically and 1st Eastern Europe, and lo market additional amounts of gas in Western Europe, will determine how much gas the Soviets produce.

Cool

s in tbe case of oil and gas, coal iwr^octioo ts declining in the. western USSR and increasittg in the eastern USSR Unlike oil and gas. however, much of the eastern coal cannot be exploited because of coal quality and critical transportation problems. Because of severe technical and economic problems, even lo maintain coal output wiD requite that theigher priority in investment allocations than In the past. The coal industry's share in total ^vestment in fuebcJectiv: power has (alien from aboutercent fn theoercent inlan, rdlecling the increased requiresnents and priority of oil and gas. Even If investments In the coal industry increase substantially over tbo next decade, much of the increase will be required frost to cope with the declining energy coolent of coal productioo-

The USSR has several large coal deposits in Siberia and Kazakhstan, most of which can be mined by labor-saving open-cast methods, but the difficulties of transporting this coal to the principal consumingate immense. Production increases in the most accessible eastern coal basin, Eklbastut. arcaior strainail systemlreadybod

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The coal from (he Karisk-Achinsk Basin in Easl Siberia cannot be transported for long distances in raw form because it contains mote thanercent water and is subject to spontaneous combustion whento air.

he Soviets have been exploring alternative technologies for using eastern coal domesticallyarge scale In several general approaches, none of which couldubstantial Impact during:

Burning the coal in power plants near the mines in Eklbastax and Kansk Achinsk andthe electricity to the western USSR over ultra-higb-voltage power lines.

Upgrading the coal quality through processing in facilities near the mines and transporting the resulting coal and synthetic fuel to the western USSR via railroads initially, and eventually In pipelines for coal slurry and synfuels.

Working with Western firms, especially West German and Italian, or otherwise incorporating Western technology in the development of coal slurry pipelines, synthetic fueb from coal, and long-distance, ultra-high-voltage electricitysystems.

electric Power

During, nearly two-thirds of the likely increase In output of electricity will come fromand hydro stations, predominantly nuclear stations. Construction and engineering problems held back the nuclear program in, delaying completion of about half the planned projects, and construction of nuclear plants continues to lag behind plan. Even with these setbacks,sse rating capacity should growegawatts0 to at0 megawattstill, the below plan growth in nuclear power (by0 megawatts) wilt prevent the Soviets from meeting objectives to sharply reduce their reliance on fossil-fueled electricity

At fossil-fueled power stations, problems with fuel supply and slow plant construction will plague the Soviets for the rest of the decade. These problems will inevitably result in continued interruptions in live supply of electricity and delays in brim-tits: new generating capacity on line. By the, further strains in electricity supply could result fromoperation of an increasing number of older fossil-fueled plants overdue for retirement.

Energy Production In

, gas will continue to be theof additional energy:

West Siberian gas will be by far the cheapest energy source. Gas output will be limited mainly by demand.

The cost of oil development will continue to Increase as exploitation in West Siberia moves to even smaller fields and offshore production be-cornes more Important.

Offshore development begun inill continue in, notably in the deeper waters of the Caspian Sea and offshore Sakhalin. Thus far. however, there is no evidence that either area willaior source of oil in. Large imports of Western oil equipment and technology are likely to befor rapid exploitation of oflslsore deposits.

Oil may be found in unexplored areas of the Barents Sea and Kara Sea and in East Siberia. Major discoveries in these areas, althoughto exploit, could become important in.

Technology for longdistance coal transportation and long-distance transmission of electricity from Siberia may substantially improve, which couldarge increase in coal output by the latter part of the decade.

A suable share of electricity will be produced in nuclear plants, and the nuclear construction program may become more efficient.

Under these conditions, oil production will probably decline over the decade ofs oilcosts rise and as gas and nuclear power are increasingly substituted for oiL

Prospects for Energy Consumptionends

consumption of energy in the USSRto be driven primarily bv the overall growth

of (lie economy. The rale of growth of Soviet CNP hu been declining, from in avengeercentercente protect average annual CNP growth rates ofpercentridereeat. These projection! assume, oo the one hand, that severe shortages of critical Inputs, Including energy, do not develop, and, on the other hand, that major improvements laefficiency are not achieved Soviet energyhas rben as fast as or faster than Soviet CNP for many yean (figureo the past decade Soviet energy consumption increasedercent per year and CNPercent Energy consumption per unit of CNP Increasedercent. despite some Soviet efforts to conserve energy. In sharp contrast, after rising substantially during the earlier period of declining real energy prices, energy consumption per unit of CNP In the United States, Western Europe, and Japan has fallen byoercent3 In response to the rise in real energy prices daring that period

tnajor cause of the rapid rise In Soviethas been tbe extraordinarilyof tbe stock of plant andyearndearor some two thirds farter than Inwhose aggregate CNP grew at aboutrate as the USSR's.

Conservation and Substitution Problems

rigidities andalso have greatly hindered SovietUnlike Western eccoocnies, thehas been unable to take advantage ofpossibilities for conserving energy throughtn management and small-scaleby inch vidua! factories or households Tbethatmall part of energy use Is accurato-

Figure*

ussr: Energy/CNP Rula

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measured and controlled at the point of use. The kinds of Quick energy economies which were obtained in the West by improving insulation, lowering tbermo-stat settings, and making many other small andadjustments, are not available or apparently have been largely Ignored In the USSR. The reason for this is partly that the Soviets have not organized themselves for this purpose and partly that energy users have had little incentive individually to take any action.

The Soviets are aware of the potential for conserving energy by Investing in moreequipment and structures, and apparentlythat energy can be conserved more cheaply lhan it can be produced. However, the realization of this potential saving has proved difficult since Improving energy efficiency is only one, and by no means the most important, of the many goals Soviet machinery producers and builders must meet. Designare being made, bul slowly because of the disinclination to take any chances on not meeting production targets. Moreover, with the growth of Investment expenditures substantially reduced because of general economic problems, the inclination loany delays in delivering equipment for the sake of improved energy efficiency may become even weaker.

Also detrimental to energy efficiency is the deep-sealed Soviet practice of continuing to usecapital equipment as long as it can be repaired. The average annual retirement rate of Soviet capital stock has boeoercent, less than half of that normal in Western practice, and, in contrast to theo major Industry has scrapped Its old equipment and replaced it with much more energy-efficient new equipment.

These fundamental constraints make it unlikely that Moscow can make rapid progress In energy conservation. In the long-term, however, steady and eventually substantial conservation probably can be achieved through Improvements In the energyof hew equipment. Moreover, results could be achieved more quickly if the Soviet Governmentigh management priority to energy conservation, and consequendy were willing to sacrifice otherobjectives which might compete with it. In the2 general price revision, ihe Sovietincreased wholesale prices for crude oil and oil productsercent and average wholesale prices for energy products by about two-thirds. These were the first changes in wholesale energy pricesigher energy priceselatedof tbe Urge rise io domestic energy costs, and perhaps also of the surge io world market prices during the past decade- They cannot be expected, however, to have much direct impact on Sovietdecisions because these are mainly governed by other criteria, notably production plans.

here are fewer institutional and economic barriers to substitution of one type of energy for another. Converting industrial or power plant boilers (rom oil lo gas, or to dual ose. for example, isairly simple matter if the gas is made available. Given the relatively low cost of gasit makes good economic sense to substitute gas for oil and in some areas for coaL

Secforol Energy Use

he slow upward trend io the cncrgy-CNP ratio duringas partly the net resultelatively rapid increase in the output of energy-intensive sectors. In addition, energy use per unit of output Increased in agriculture and construction, mainly because of mechanisation, mote thana stow decline In energy consumption per unil of output In Industry and electric power. Energyin transportation and in the trade and services sectors showed little change- Sectoral trends in energy use arc shown in table 3.

n, mechanization In agriculture and construction probably will proceedlower pace because of the general squeeze on investment funds, and energy efficiency in industry should Increase at. least as rapidly as in the past decade, given likely government efforts to introduce more energy-efficient equipment. The growth of transportation, trade, and services activity will be substantially slower, in line with the slower growth of GNP, and probably with little change in energy efficiency. Inurther increase in ihe share of total freight carried on trucks will tend to reduce energy efficiency because trucks arc far less eneigy-efficient than railroads. On the otherhift toward dicsel engines in trucks will tend lo raise efficiency. These developments could resulteveling off of the encrgv-CNP ratio over Ihe decade without any maior policy shift.

. .

3

USSR: Estimated Energy Use by Major Sector

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Oil coosumptWo probably will grow more slow-ly during the neat few years, and may level off late in tbe decade. Oil constitutes nearlyercent of the fuels used in transportation and ovet half of those used in agriculture In neither of these sect on Is substantial substitution for oil feasible. Their combined oil eon-sumption probably will rise byillion barteU per day over the decade. As mentioned above, however,arge potential for substitution of gas for oil in electric power stations and industrial boilers, but implementation may be slow.

Progress in reducing oil usage in power stations is being held back by the need to use gas to offset shortfalls in coal production and the deterioratwn of coal quality. Currently, oil is live backup fuel in most boilers designed for coal, so oil consumption incieases when coal supply problems arise. Bv bringing gas to these coal-fired plants, the Soviets ate curtailing use of the standby oil and increasing power plant reliability, but this results in diversion of resources Irom the main substitution objective, replacement of oil with gas. Since consumptioo of substantial amounts of oil to offset coal shortfalb at power station boilers is likely to continue, there may be little net reduction of oil use in this sector during the

Industry, there has already been greatin boosting gas use The oil share couldmore, to perhaps as little asercent Inwithercentut only withhigh priority effort Such brge-sealehowever, requires rapid expansion of tbenetworks so lhal most power plants andhave access to gas. Moreover, the glowingofus of oil products consistentin demand mar also limit the rate ofand push up the demand for oil.

products (diesd fuel, gasoline, and jetspecially In transportation and agriculture, and possibly stable or declining demand for residual fuel oil, for which gas will be increasinrJv substituted. To meet these demands, the Soviets will have to either change their refinery mix or adjust their oil trade. But this will be difficult Major changes in the refinery mix wouldarge expansion of secondary processing facilities, and -Moscow may have to import some Western equipment for the many catalytic cracking units that may be needed. So far. however, Moscow has not made the necessary investments; only two catalytic cracking units are being built, apparently with Soviet technology. There are also manyon adjustments through trade tn crude oil. residual fuel oil. and products with Eastern Europe and Western countries. If adjustments in the refinery mix and in foreign trade do not keep up with changes in the pattern of demand, surpluses of residual fud oil and deficits of light products will develop

Foreign Trade in Energy Soviet Policies

In developing its energy resources for, Moscow will be trying not only to meet domestic energy requirements but also to provide criticalexports to Eastern Europe and maintain or expand energy exports to tbe West for hard currency. The total volume of Soviet energy exports grew steadily in, althougheclining rate, but leveled off. Soviet energy exports are of fundamental importance to Eastern Europe, representing someercent of those countries' total primary energyExports to the West constitute more than half of total Soviet bard currency earnings.

Energy exports Inill be affectedomplex mix of economic, bureaucratic, technical, and political considerations that neither we nor the Soviets can predict wiih any confidence- Faced with many uncertainties. Moscow characteristically tends to aim towardIn this case probably means making provision at least to maintain and perhaps to increase slowly net energy exports over. But unexpected energylarge increases or decreases in world oil prices, shortfalls in planned Soviet energy production, or lareer or smaller than planned increases in domestic energyeither raise or lower future energy exports.

mong the economic considerations in Soviet energy export policy is the profitability of these exports in tbe longer term. Although available data on Soviet energy costs are few and their meaning is often unclear, there is sufficient evidence to indicate that, exports of gas to the West are highly profitable and that exports of oil probably will continue to be more profitable than most noncnergy exports, despiteincreasing domestic costs. Gas exports, however, are limited by Western demand and by Western political considerations, while to raise or even to maintain oil exports requires large and growing investments, which must be bid away from high priority domestic protects.

Exports to Communis! Countries

boutercent of current Soviet energy exports now go to Eastern Europe. Cuba, and other Communist countries. These exports have Involved significant costs to thebecause under the Council for Economic Mutual Assistance (CEMA) pricing scheme, basedive-year moving average of world prices, Moscow charged its clients oil prices far below world market levels, and partly because of the opportunity foregone to sell the oil in the West for hard currency. The stosv phasing in of oil price Increases was designed to spare the East European countries the necessity of rapid, disruptive economic adjustments.oscow also tried toeduction in East European dependence on Soviet oil by promoting long-term energy strategies keyed to conservation, coal, nuclear power, and expansion of the unified electric power grid linking the Eastcountries and the USSR. The new oil price lumps. however, followed by Soviet hard currency problemsed Moscow to take strongerAlready having warned the East Europeans not to expect increases in planned oil deliveries duringive-Year Plan period,2 Moscowcut its oil exports to East Germany. Caechoslova-kia. Hungary, and possibly Bulgaria by aboutercent. Although the price of oil on the world market declined. the CEMA pricing formula had the effect of further increasing tbe price of Soviet oil to Eastern Europe

-SCOftO*-

The liard currency earning possibilities of Soviet client states are Uuuffieleiit lo replace much Soviet oil through import* Irom WeMein markets The East European economic* are already lacing near economic stagnation, partly because of hard currency debtthe world recession, and the disruptions in Poland. While there isotential in Eastern Europe for some additional energy conservation and for substitution of Soviet gas for oil lo industry, progress will be slow. Thus substantial additional reductions in Soviet oil deliveries would call for intensification of austerity measure* in Eastern Europe and aggravate the danger of popular unrest.we believe that the Kremlin would not be Inclined to give Eastern Europe priority over its own domestic oil consumers or Its hard currency oil exports should oil supplies become Inadequate to meet al) major Soviet objectives Moscow might then make additional cuts in oil deliveries to Eastern Europe and trust to the coercive power of the East European regimes,by Soviet power, to maintain social order.

Hard Currency Exports

oscow probably expects energy exports to continue as its principal source of hard currency earnings. The prospects for most other hard currencyexample, wood, machinery, andfrom fair to poor Even hard currency earnings from arms deliveries will be hard to sustain as maior Soviet customers confront their own payments problemso evidence that Moscow isa major program lo reduce Soviet dependence on energyource of hard currency earnings. There are many ambiguities In Soviet policy concerning hard currency energy exports. Moscow cut oil, but less than the rise in oil prices, so total earning* increased In some years,xport earnings have declined and imports have been cut. especially in the case of machinery and equipment. How much Moscow would be willing to reduce hard currency imports, if maintaining them meant serious domestic oil shortages, would depend on many factors, including the food situation, thefor oil price changes, and Ihe state of East-West relations. Clearly, however, some hard currencyare of great Importance to the economy and would be mainlainnd even at the cost of significant disruptions in domestic production

share ol natural gas in total Sovietfor hard currency will increase in theprobably ins well Completion ofSiberia-to-Western Europe gas pipeline willan expansion of Soviet gas export* of aboutunder existing contract* (that is. sot Indand eventually byercent ifis used at capacity- Moscow has ampletoecond, orhird,Western Europe, should there be sufficientbut these are not Ukdy to be built untilIf at alL Some decline in oil export* socnuIn view of rapidly rising costs ofEven so, Moscow probably willIt needs toubstantial level ofoil exports because, unlike gas, oil can bea small scale and in many different markets, andlet* visible than the massive gasat least through. Moscow willon oil exports as an important source of

Energy Investment

Energy investment is surging because of both rising investment costs of new production and the need to make up for past neglect in some areas. Innd most of, Moscow held down Ihe share of energy In total investment by meeting the minimum needs of tbe top priority energy sectors at the expense ofo longer possible, investment costs are increasing in all areas of energy, in some cases very rapidly. Energy investmentsre Ukdy to beercent higher thannd will probably constituteercent of total capital Investment, compared withercent. Investments in gas are planned lo increase by two-thirdstableased on leaulls12 and our analysis of drillingand costs, oil investments will nearlyough allowance for investments in oil refining (which Moscow classifies under chemicals} and energy-related infrastructure combined would probably raise the overall energy share to well overercent

Energy investment will continue tof present policies emphasizing energy production continue. If oil production were held5. oil Investment probably would again about double;inimum, should the

that total new Cued is vestmentercent above pUa.pcrccnt incicaae In total new fucd urvcurocotI-BJ.

ol newly developed fieltls prove sullident to greatly slow the decline In well Now rates, investment would Increase aboutercent. Investment in coal and electric power would probably increase moreubstantial decline ts likely in gashowever, in slurp contrast lo the Urge increase. as the current exceptionally Urgepipelineompleted. Underoriented policies, the share of energyIn total investment would continue to increase, but probably less rapidly than. If Moscow allowed tbe growth of energy production to slow, however, and oil product ion toexample,illioncould stabihre or even slightly reduce the energy investment share. The considerations that will determine Moscow energy investment policies are discussed in the ncit section

oviel energy investment probably crcceds US investment, which inrger than the combined total lor Ihc res! of iheminunbl world. Both the USSR and the United Slates devote aboutercent of total investment lo energy, and the dollar value of total Soviet investment Is probably somewhat above the US level. However. Sovietot much over half the US level. Energy investment trends have been upward in both countries, but their timing differs. While US Investment In oil and gastook Urge jumps immediately after both3 and9 price increases, the main surge in Soviet oil and gas Investment did not begin until the. Moreover. Soviet energy investments, and those for oil development in particular, will continue to increase rapidly throughout, while those in the United States apparently have already leveled off.

he larger magnitude, of Soviet energycompared with' that of the United States does not reflect differences in energy resource endowment; on the whole, these differences clearly favor the USSR. Well flows for both oil and gas on the average are much higher in the USSR than in the United States, where ihe larger fields have been in declineong time, and where high prices justify the development of very small fields with well flows far lower than anything the Soviets are exploiting. Rather, the high Soviel investment costs appear to reflect systemic and policy differences. Because Moscow delayed for years laklng up the energy problematter ol high

investment requirements accumulated.the Inability of the Soviet management system to make much progress In energy conservation put nearly the entire burden of adjustment on energy supply. Consequently, the USSR must increase energymuch more rapidly than the United States, which requires massive In vestment.

Energy Policies in

n IU energy policies for, Moscow will have to balance several objectives thai will be difficult to achieve simultaneously. With regard to energy production, the Soviet leadership will be trying to hold investment costsevel which does not divert so much scarce capitalreates serious problems for other economic lectors and for the growth of the economyhole. With respect to energyMoscow will try to avoid energy shortagesof production processes over long periods. With respect to foreign trade,mportant to thetoevel of energy eiports sufficient to avoid severe political problems in Eastern Europe and to ensure that il least the most essential imports from the West can be paid for.

n the current Five-Year, Soviet energy policies ate primarily production oriented. The Large planned rise In energy investmentsillingness to pay for tbe rapidly rising costs of developing energy resources in order to cover domes tic and exportlanned investments should be sufficient to raise oil production torobably realistic view of ol! drilling requirements. Gas production5 should be aroundil equivalent, below plan but still sufficient to meet demand. Coal production in terms of energy content will be about constant and nuclear power production will grow, but less than planned. Therereat deal of talk, but little action, to stimulate energy conservation Although gas-for-oll substitution is being pushed hard. II Ii not progressing as rapidly as planned. Net energy exports willbe maintained or slightly increased

S3 Energy prospects ia tbe second half of the decade are much more uncertain than thoseot only because ol uncertainty reaiiding production, conservation, and substitution is substantially wider, bul also because Soviet energy policies may change With the rapid growth ol energy investment in the current Five-Year Plan period, it is becomingdifficult to fund new programs In other areas. Consequently, it is reasonable to expect thai political opposition to costly production-oriented energywill increase Although energy investments are only part of the picture. In the current Five-Year Plan their share of llie total Ii increasing byercentage pointsime when total investment is growing veryIncreased claim comparable to that given to agricultureecide earlier. Investment in heavy industry is increasing dowlyj efforts are being made to rebuild the transportation sector after decades of neglect; agriculture is holding its own in investment allocations, and together withakingercent of the total; investment in comu merortented light industry, andprobably (ailing in absolute terms. Continuation of production oriented energy policies would probablyurther increase in energy's share of total investment. squeezing investment in other economic sectors and feopardiilng Objectives for rablng living standards or possibly even military production.

Under these circumstances, the Sovietmight consider alternative policies to achieve substantial savings in energy investment during the oext Five-Year Plan In order to save on investment, Moscow must cut the demand for energy, especially oil. so that it can meet its domestic and priority export needs wiih less growth of energy production. Limiting energy consumption in general, and oil consumption in particular, would mean greater emplusu on energy conservation and mtrriuel substitution. The shiftore ccflserwticnorientcd policy could be attractive in view of Soviet eipert claims thatuch cheaper to conserve an eitra unit of energy than to produce It Theertain loighly contentious one. and we cannot predict the outcome of the debate.

To illustrateroduction-orientedonsumption-oriented policy might work out, notional protections ol energy balances0 arc set out in tableoasis lor comparison, both of0 balancesnsuucted on the assumption that CNP "ill grow at an annual rateercentn the pr'duct ion oriented scenario, drilling and other investment in Ihe oil Industry increases rapidly enoughmaintain oil productionhis policy is more liVelv

- *T r t

Tab,cW oil

USSR: Energy Balances5 and0 Scenarios

Scenario!

vm

km

F:n: ii

Conmmptioa

caeff 1

J.J

I.J

cnrtzi

I

fifsreiarc iBunrtiirc rein lis of ittcnuiivcacy dof forecasts.

be followed, the bettci the quality of the new oil fields available for development. By the time the new Five-Year Plan Is completed. Moscow should have better information on the technical possibilities and problems of oil development. In the scenario, gas production continues to rise In line with domestic and eiport demand, while nuclear power and coalIncrease as much as is technically feasible. At the same lime, although no extraordinary measures are taken to push conservation, the energyONP ratio leveb off. The resultevel and composition of energy production that meets domestic requirements andmall Increase in net energy eiports as rising gas eiports more lhan offset the slight decline in oil sales.

SO In acmpeiasiring limitation of energy consumption. Moscow puts teeth into energypolicies by nuking energyop priority management objective and by severely ration ingallocations to producers and consumers Cas for oilushed hard, especially In industry and electric powern support of which theof local gas distribution networks and oil cracking facilities would beigh priority. Substanlially less investment is allocated to energy production, especially oilesult, production of oil declines to5. coal production drops slightly, and the increase in nuclear power production is slower, in this scenario, if Moscow were able lo hold the annual growth of energy consumption to about half Ihe rate of growth of CNP. domestic enemy needs could be met. but onlyalrly substantial decline in oil eiraorts.

Continuation o( productiOn-orientcd policies, while minimizing problems of supplying energy lo ihe domestic economy and Eastern Europe, and permit-tinc hard currency energy eiports to be maintained, would have advene af feed on other areas of tbe Soviet economy. There wouldurther Increase In tbe share of energy inn the unlikely case inere highly favorable In all major energy sectors. Probably about half of the likely increase In total Investmentould go to energy. If heavy industry and agriculture continued to receive priority In tbe allocation of the remaining investments, investment in other consumer -oriented sectors would probably fall in absolute terms.ecade of such derlines. living standards wouldbegin to deteriorate If Moscow could not accept the decline In living standards brought about by this investment pattern, and instead decided to cutin heavy industry for several years, thebetween defense and civilian uses of Investment funds would become more severe, and the growth of either military programs or total capital investment would have to be slowed

Energy policies emphasizing the limitation of energy consumption could ease the burden of energyciveigy share of total Investment would level off oiconsequently would free up more investment funds for other sectors, but would involve risks of serious difficulties in energy supplies for domestic use and exports Although we cannot be confident about estimating the effects ofpolicies because they have never been tried in the USSR, our knowledge of the way the Soviet planning andsystem operates gives reason for doubt. Thereubstantial possibility that the Soviet political leadership would underestimate the difficulty of achieving conservation objectives. In setting an energy production plan, the leadership cannot Ignoreconditions and engineering analysis, which largely determine production possibilities. But with respect to energy conservation, eipcrt Judgment as to what is technically feasible may have little bearing on what can be achieved, given the economy's systemicAn energy plan in which meeting domestic and export objectives required large-scale energythus might well lorn out io be unbalanced. It would then be difficult to avoid widespread energy shortagesarge decline in energy eiports.there is little doubt that energy Is usedin many parts of the Soviet economy, this inefficiency does not easily translate into usablefor conservation. Moscow has the power to force cuts in energy use. but this may be at least io part at tbe cost of slower growth of output and reduced labor productivity. Accelerated energy conservation also could be achieved through investment In new equipment of improved design, and by accelerated retirement of existing equipment But suchwill be limited by the rovestment slowdown, sluggish tecisnolocxa! change, and unwillingness lo accept even temporary declines in output in industries.

n order to minimize the problems that are likely to result from the two fairly eitreme energy policies. Mrrscow Is likely tois of policies that have elements of both scenarios, or somepolicies Policies also will be adjusted to try to correct problems as they arise, and in response to unexpected developments sucharge Increase or decline in international oil prices. Both in its initial policy choices and In later adjustments. Moscow will be trying toeasonable balance between ils objectives of minimizing the energy Investmentmeeting domestic energy needs, assuring energy exports sufficient to maintain reasonable economic performance in Eastern Europe, and earning enough bard currency to coves at Least high priority Imports

lthough the policy mu rs likely to be an admixture of those specified in the two scenarios, the notional projections inhould not be viewed as bounding tlir range of possibilities because pioduction. consumption, and eiports of the various forms of energy are Interrelated. Moreover, the uncertainties regarding Soviet energy policy and the technicalfor energy production are not the only factorsirm rarojection of energy production, consumption, and trade. Faster or slower growth of CNP than theercent -oold raise or lowei energy demand, consequently forcing modifications of policies concerning production, conservation, or trade. Changes In real world energy prices would affect both the profitability ol energy investment and the volume of energy eiporh required loiven value of imports

fl'f'

ho indications o( Soviel intentions foe energy policyte sparse, iniicd, and inconclusive The possibilities lot and benefits of energyarering growing attention, but it is not yet clear how desires are to be translated into actions. There is do reason to doubt that the Soviets intend to push gas-for-oil substitution as hard as they can. As to intentions for oil production, most Soviet public state-menu have Indicated in general terms that oil produc-tioa was expected to level off. Moreover, completion of the new long-distance West Siberian oil pipeline now under construction would provide the capacity to transport enough West Siberian oil to beep national output roughly constant In the past year or so.

however, private statements by some Soviet officials, although giving no forecasts, suggestecline in production may occur. Il is highly probable that the issue of oil productiontill open. With respect to foreign trade In energy, there are no indications of future policy trends. We should obtain early indications of Soviet policy directions ason the new Long-Term Energy Program, which has already beenevealed. Inenergy policy, and Us rote in investment pcJiey, will be debated at forthcoming Partyist of indicators of key Soviet energy trends and policy decisions that should be monitored by the Intelligencet Inset.

Indkotoes ol

Information on Soviet pUns for the energy sector during the ISth Five-Tear Plan periods unlikely la be released by Moscow until well6 al the earliest Even then official announc^rnenti -ill probably be limited to planned production of the various forms of energy, and perhapsaingic figure for total Investment in ihc luel and energy com plea fas was the ease1 Some data on iiivettmcni in individual energy sectors may be published in special-iced tourruliut onlytt-or-miss bans

Some earlier Indicalions of likely Soviet energy policies should .become, available. however, enabling Intelligence analysts to reduce the ranee of uncertainty about the likely Soviet energy policy mU.

hile iheie It surreemcni on ihe general energy trends and policy choices,ange of judg-rrtents on how much difficulty tbeikely to experience in achieving an acceptable balance among iU main energy objectives. Some analysts. Including those in DLA, believe that Moscow has correctly assessed both demand trends and the technicalfor energy production, and ceanequently will produce as much oilecessary to meet domestic and export needs. They believe that if progress In energy conservation and Interfuelproves to be slow and Moscow considers it necessary to maintain oil exports, the Soviets would keep oil production fairly constant. They realize that the burden of energy investment may continue to Increase, but believe that tbe increase will not be large. Moreover. Moscow may believe that the economic benefiu from incremental energy investmentstlie resulting hard currencysuch, on balance, as to enhance the overall productivity of the economy. Other analysts, including those in CM/DDL believe that rapidly rising investment costs are likely to leadradual fall in oil production5 They also believe that the Soviet leadership will, as in the past, overestimate the possibilities for energy conservation and interfuel substitution. Consequently, shortfalls In oil supply could develop that would disrupt tbe domestic economy and squeeze exports. Because opracctunlties to reduce oil deliveries toEurope and to Increase gas sales are limited in, these analystsecline in hard currency earnings from energy exports if oil and gas prices are unchanged

A willingness to import large amounts of Soviet gas -enough, for example, to fill an additional Siberia-to-Western Europe pipeline of (lie sue of the one recently laid would, al present gas prices, provide additional Isard currencyof nearlyillion per year

Development of the deeper ol (shore oil deposits in the Arctic, the Caspian, and Sakhalin, depend heavily on Western equipment and technology

Although these deposlU will notajor impact on Soviet oil production in, some of them may become important in

More generally, as oil eaploitxtion involvesdeposlU and more sophisticated forms of secondary and enhanced recovery, various kinds of Western technology will iocreavsingty be needed.

Although tbe USSR will probably become less dependent on the West for targe-diameter pipe production and turbine-com pressors, imports from the West will Involve lower costs and greater efficiency. Moreover, tbe attractiveness of the Soviet market to Western equipment producers may give Moscow opportunities to use the offer of additional equipment purchasesargaining chip in any negotiations on new gas rxofcetx

Finally, being severely strapped for investment resources, the USSIt would seek and greatly benefit from large Western loam to finance imports for energy development

Implications for US Interests

energy dcvelopraenti havefor US and Western intcresUtheir impact on Soviet economicresource allocation and through theof influence that these developments mayboth ihe West and the USSR

the extent that Soviet economic growtheither indirectly because of the rapidlyof energy deyelopment, or directly becauseshortages. Moscow's policy choices inamong the competing obfectives ofand investment, will become moreAlthough the military will probably retainposition in the resource competition, itfully insulated from the economic problems.shortages of key industrial materialsbottlenecks due largely tohave slowed output in someplants. Military procurement and otherat lime* has been restricted toinvestment in high priority civilianas agriculture and energy. Leaden of ihe Soviet

industrial comccogniie iftsl in (he loog-ei Icim. continued growth of (ha heavy Industrial bate is essential to expansion and modernixatioc of military output. Thus, while their is little direct competition foe resources between the enemy and the military industries, the increasing investment burden ofadequate energy supplies may indirectlyactor slowing military cipansion.

has .educed tbe perceived urgency of planning additional gas applies for the following decade. If competitive alternatives are not found, or if the West Europeans are unwilling toremium foratives, the Soviet Union would beood posi,ion toreater share of the West European gas market in

Soviet dependence on the West for important energy markets, especially gas. and for energyand technology, gives Western countries some important potential policy handles. As mentioned above, tbe cipansion of Soviet gas production wilt depend partly on the volume of exports to Western Europe, especially in. Many billions of dollars in export earnings or. should gas be substituted for oil In energy eiports, maior savings in investment costs, would accrue to Moscow. The importance of imports of Western oil and gas drilling and processing equipment is likely to grow In thend especially ins Moscow dependson exploiting deeper, more complex deposits. Most of the needed equipment Is available from Western sources outside the United States.

v the same token.ontinued ability to eipotl substantial amounts of oil to the West, and especially its strong positionow cost, potentially very large supplier of gas to Western Europe, gives ll Strong assets with which to bargain with Western countries,otential basis for enhancing Its economic ties, and at least indirectly itsnfluence In Western Europe.

6ft We expect Soviet gas supplies to account for roughlyercent of total gas consumption inEurope andest Germany and France0 Despite plans to develop energy supply alternatives. West European reliance on Soviet gas could increase substantially in. The current comfortable supply-demand outlook through

estern Europe will need to contract forgas supplies in. If Industry midringe demand estimates prove accurate. Indigenousgas production plus gas available under existing import contracts will fall some SO toillion cubic meters short of requirements by theQ. The Soviet Union could supply an additionaloom from existing pipelines. If It should supply even one-half of the West European demand gap, an additional plpelino of the size of the one now under construction would be needed, and dependence on Soviet gas could approachercent for major countries of continental Westernin excess ofpercent dependence that wc and some West Europeanlegardritical threshold for political risk Dcveloprnent of maior Norwegian fields, especially the Troll field, could covet most additional West European gas needs In, but only Ifand technical analysis are not longdevelopment of new areas of tlse North Sea will takef buyers are willing to commit "llsemselves toelatively high price for the gas. I' new Norwegian gas can be developed for the, and Dutch gas production can be maintained in the meantime, thereood chanceew Soviet pipeline will not be needed, although Soviet gas deliveries through existing pipelines probably will continue to increase Other potential alternative sources of additional gas (Algeria. Ubya, Cameroon, Nigeria, Qatar, andither would probably cost at least as much as Norwegian gas or beless secure

26

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